Insurers in for lax equity cap

HYDERABAD | MUMBAI: With equity markets showing some signs of recovery, the Insurance Regulatory Development Authority (Irda) is vetting a proposal to allow all insurers raise their stakes in blue-chip companies and state-owned banks.

At present, the regulator allows insurers to invest only up to 10% of their portfolio in shares of a single company. State-owned Life Insurance Corporation, flush with funds, has been pitching for hiking this limit to 20% to ensure that it continues to invest in blue-chip firms .

���We have asked LIC to furnish us with details of their exposure both in equity and debt instruments to take a final view. A relaxation, if any, in the investment norms will be done for all insurers and not restricted to LIC,��� Irda chairman J Hari Narayan told ET.

According to Mr Narayan, LIC has also sought an expansion in the window for investments in infrastructure and a higher exposure in state-owned banks. The insurance regulator plans to do a risk analysis on the status of stressed assets of banks before taking a final view.

Incidentally, LIC owns 26.32% in Corporation Bank, but the investment was made a few years ago when it enjoyed a special dispensation on investments. India���s largest insurer���s stake in five state-owned banks, including SBI, Punjab National Bank, Canara Bank, Bank of Baroda and Bank of India, is below 10%. Besides, it also has stakes in many blue-chip companies like ITC, L&T, ACC and Cipla, among others.

Industry experts said LIC picked up huge stakes in companies because it had developed products with a high interest rate element. Therefore, the corporation invested in shares that offered high returns to meet these guarantees.

But LIC has been acting as a counterweight, buying shares in a volatile market when all others, including FIIs, were on a selling spree. A higher cap will enable LIC to take advantage of bargain prices and provide a balance to the markets.

However, unlike LIC, which is flush with policyholder funds, private insurers may not be able to raise their stakes in blue chips substantially if the cap on equity exposure is raised, said an analyst.

For starters, Irda changed investment norms last August and allowed LIC and all private sector companies to invest up to 10% of outstanding shares, or 10% of the fund size(whichever is lower), in shares of a single company. The aim of the conservative limit was to check over-exposure by an insurer in any single company.

LIC resisted the move as it meant pruning stakes in companies where the ceiling had been breached. The regulator later clarified that the new investment norm will apply only to future investments.

���From a risk management perspective, insurers holding stakes in a single investee company need not increase the risk. One needs to look at what proportion of the investor company assets are parked in any one company,��� said the chief financial officer of an insurance firm who did not want to be named.